Cost Savings Innovation in a Downturn

Article |
Fri, 07/30/2010 - 23:13

Manufacturers are feeling the pinch in demand in many categories as a result of consumers' tightening wallets. As many also face increasing costs in areas such as health care, energy, and materials, some must consider cutting costs in an effort to maintain sales and profitability. These changes include increasing price, revising package size or materials, and changing the product formulation.

If there's one overarching message for manufacturers, it's this: Now is not the time to pull back on innovation or marketing support. Indeed, Nielsen research reveals that brands that continued to invest in innovation and provide marketing support during past economic downturns have performed significantly better after the economy recovers than their peers. As manufacturers pursue innovations that involve cost savings, careful attention to consumer reaction is critical for success.

Consumers are extremely savvy—they notice changes to products they care about and are increasingly vocal, particularly on social networks, blogs, and on-line discussion boards. All the attention given these days to the media "groundswell"—and the high-profile nature of products getting lauded or attacked on YouTube, Twitter or other consumer-generated media-ups the ante for manufacturers to link changes to packaging or product to more substantial benefits as they pursue this strategy.

Guiding principles Based on Nielsen's examination of over 100 client engagements related to cost innovation conducted over the past five years, four important principles illuminate the way to help manufacturers make wise cost-reduction decisions that will drive successful consumer acceptance in the marketplace.

…Downsizing the Package Size: a somewhat risky change, especially evident to a brand's heavy users, which can best be mitigated if additional auxiliary benefits are conveyed with the change. …Upsizing the Package Size: a preferable consumer option, which still has pitfalls if pricing crosses a consumer threshold, or if the consumer has a difficult time perceiving the relevance of the larger package beyond solely "more for the money." …Changing the Packaging Materials: a margin-enhancing move that may also be leveraged for positive consumer good-will; yet must not erode functionality, structural integrity, or brand equity. …Changing the Ingredient Formulation: a high-risk move that must not compromise the consumer experience, perceived quality, or product efficacy.

Downsizing the package size Based on 40 Nielsen BASES studies of cost savings innovation and 59 packaging studies, Nielsen found that downsizing and downcounting (i.e., moving from a 6-pack to 4-pack) alone can be a risky strategy. Over time, that data shows that even when manufacturers consider adding a smaller size to an existing product line, the resulting increase in purchase frequency of the new smaller size is not enough to offset the negative transaction size impact to the business.

A few exceptions to this trend include when the smaller package added: a) unique, incremental channel distribution, b) new consumers to the franchise, or c) a unique usage occasion that was independent of the prior large package.

The most important success factor to downsizing is to combine it with innovations that yield additional positive consumer benefits or experience with the product. What's more, these benefits do not necessarily add cost. Examples of successful strategies include adding a resealable benefit to the smaller pack along with new graphics and a different package shape, moving from glass to plastic containers, or combining "new news" with a sleek new convenient and easy-to-transport package. Presumably, these changes add perceived value to the product experience, offsetting a straight package downsizing which likely could have been viewed as negative on its own.

Additionally, Nielsen analyses have shown that downsizing was received better than price increases. Successful downsizing with constant pricing typically works best under the following conditions:

…The manufacturer is a significant market share leader within the category. …The downsizing includes a large number of SKUs within the category so as not to penalize a small subset of the competitive frame of reference. …The percentage package size reduction is less than 12 percent. …The categories have highly expandable consumption.

Upsizing the package size Clearly, consumers like large economy packs. And for manufacturers, their appeal lies in economies of scale and more efficient use of plant capacity. Not to mention that consumers buying large quantities can stay out of the competitive shopping cycle for a longer period of time. Economy or bonus packs can be extremely well received, particularly when they add benefits beyond a better price per unit.

There are a few key stumbling blocks to a successful upsizing, including pricing an item too high or offering packaging that is too large to be convenient. In one case, doubling the size of a kitchen/bathroom surface cleaner produced better value perceptions, but no increase in purchase interest. One issue was the dilemma of home storage; the other, a concern that consumers didn't need so much product. Other examples showed that while a product may have perceived functional advantages, concerns around the absolute price could exceed a cost threshold. Upfront consumer communication can make or break an up/downsizing effort. Manufacturers should consider including quick, simple communication, possibly at the point-of-purchase to reassure consumers of product benefits.

Another consideration is retail shelving. How will the package fit on retail category shelves, and will it be easy to achieve at least a full case pack out on the shelves? Additionally, choosing the right retail channel for distribution is an important factor as warehouse club shoppers, for example, may react less favorably to upsizing ideas since the packaging isn't much different than the big boxes they already buy. Despite somewhat positive consumer reactions to the broad idea of upsizing, it is not always an easy decision to simply say "go." Consulting retailers regarding these initiatives in advance may be especially helpful.

Changing the packaging Innovative packaging changes have the potential to not only create cost savings to the manufacturing process, but also generate positive good-will media buzz. Such innovations can include moving to a less expensive package closure or seal, reducing the amount of package material, or omitting a current element of the packaging. These innovations tend to be novel; so while such initiatives may present less risk to the portfolio, they are also harder to identify.

Similar to shifting away from a more expensive ingredient to a less expensive one, moving to less expensive packaging material will produce a direct increase to margin. However, packaging changes must not diminish brand equity perceptions or the product experience. Some beverage testing has shown that a simple move from glass to plastic, while well-received by consumers, may have a long-term impact to equity. In some cases, the change can accompany a new benefit—but unlike most other cost-savings methods, a package change does not necessarily need to be coupled with "new news" to be successful.

Another avenue of package innovation is reducing the quantity of a particular material in the packaging. For example, Pepsi's Aquafina brand received considerable favorable press regarding their removal of 20 percent of the plastic weight from their half-liter bottles. Not only did the consumer-centric focus not impair functionality, but this cost-savings initiative was viewed positively as a clear environmental benefit.

Changing the formulation With rising costs of goods and pressure to keep prices low, there may be a temptation to cut corners on product quality by decreasing the costs of production. However, when Nielsen asked consumers specifically about what they want manufacturers to do in a struggling economy "produce slightly lower quality products, but keep the price the same" was the absolute last thing they wanted to see happen.

Strong product performance is critical to long-term survival in the marketplace. By changing the product formulation, manufacturers risk impacting consumers' experience with the product and ultimately their acceptance of it as well. And, while a strong product can yield consumer loyalty and much greater sales over the long-term, making formulation changes as a direct reaction to the economic climate may alienate consumers now, with little chance to win them back in the future without increased investment. As such, this strategy has one of the highest risk profiles of the various cost-saving strategies explored.

This does not mean that product formulation changes should be completely rejected as a potential cost saving strategy. There are manufacturers who have been successful, and there are a number of considerations which can help determine if a given situation merits consideration of a formulation change, such as:

•Will the change meaningfully affect the current consumer experience? •Does the product have a simple or complex flavor profile? •Can the product be moved to a higher concentrated formula? •Can the formula change be framed in a positive way?

First and foremost, know your product. Specifically, know whether consumers find your product taste profile to be simple or complex. Chocolate provides a good example of a simple taste profile, where there is one primary flavor and modifying the formulation would likely change that flavor. A more complex product example is frozen pizza, where lots of flavors work together and changing one element might not have as great an impact on the end consumer experience.

Another reformulation consideration is to move to a higher concentrated formula. Increasing the concentration may allow for less packaging or fewer ingredients, which can lead to cost savings in production and positive consumer efficacy perceptions. The laundry care category has embraced this trend successfully, where the bottles are easier to handle/store, and the detergents provide the same cleaning power as their former counterparts. This strategy is not limited to laundry care. Other household care categories like cleaners and dish soaps, personal care categories like body wash, or even food and beverage categories like powdered drink mixes and sauces are all potential candidates.

Consumers seek value In the end, it is all about the consumer seeking more value for their currently limited dollar. And value is more than price. It begins with a product satisfying a need and takes into account the alternatives available to satisfy that need. This requires work on the part of the manufacturer to ensure that the product continues to deliver and the brand remains relevant in a changing environment.

Cost-saving product innovations, when done in isolation, tend to lead to declines in perceived value and consumer appeal. Manufacturers need to know their consumers and ensure that cost-saving changes are still providing additional positive auxiliary benefits. In doing so, potential declines in perceived value or appeal will be mitigated, and opportunities for sustained sales or growth will be increased.